Context

The poverty premium is the concept that describes how people who are poor pay more for essential goods and services. There is a body of research on this topic, and when the research for this study was conducted in 2019, it was against the backdrop of a substantially reduced system of social welfare and wage stagnation. The issue is now even more pressing following the coronavirus pandemic and the policy response to it. Low-income workers were hit hardest; the industries affected, such as restaurants, leisure and non-essential shops are low paid industries; low-income workers are more likely to have been furloughed, to have lost hours or pay, or to have lost their jobs altogether than higher paid workers. The study is relevant as it is important to make sure that people in poverty can make the most of the income they do have.

The study

The study comprises the following:

• A literature review of recent evidence about interventions (such as new regulation or innovative business practices) designed to reduce or eradicate the poverty premium and any evidence about their effectiveness.
• 1,000 online or telephone surveys with people who contacted Turn2Us for help with their finances, asking about the costs they paid in domestic energy, insurance and consumer credit.
• Four focus groups, one with older people aged 55+; one with working age people who were unemployed or insecurely employed; one with people who had sought advice about their financial difficulties; and one with mothers of young children. The focus groups asked about the different poverty premiums that participants experienced; the impact of these poverty premiums on them and their households; and their ideas about what would help them to access better value services.

This study was conducted by the University of Bristol’s Personal Finance Research Centre in February 2020, and commissioned by Turn2Us, a national charity providing practical help to people who are struggling financially, and Fair By Design, a charity dedicated to ending the poverty premium.

Key findings

• The review revealed a number of initiatives underway to reduce the poverty premium in the key markets studied - energy, insurance and credit – including regulatory changes and innovations such as open banking, or a website ‘lookaftermybills’.
• The authors calculated that on average, in 2019 low-income households incurred £478 of extra costs through poverty premiums. They give a full breakdown of how this is calculated, but it included area-based premiums (such as for car insurance when living in a deprived area), domestic energy premiums (pre-payment meters or lack of switching) and high-cost credit premiums.
• The focus groups revealed varied experiences of poverty and financial struggles. Those who were retired were generally managing better than those of working age; they had a greater stability of both incomings and outgoings. Nonetheless, this older group found it hardest of all to get the best deal, and still struggled with constrained finances generally. The costs associated with bringing up children are a burden, even to those in working families.
• There were broad two themes across the research:

1. Persistent low-income levels make it hard to manage and impose constant short-term juggling of finances, not allowing many households to access cheaper alternatives; over time this manifest as substantial risk aversion.
2. Decision making during times of heightened stress or when substantial time pressure existed resulted in less well considered actions or sometimes a withdrawal from engaging with markets, such as taking out expensive credit to buy essentials at the start of a tenancy.

• The policies, practices and innovations aimed at removing the poverty premium need to take account of the heterogeneity of poverty, and make sure that consideration is given to the impacts of different policies on different groups.

Points to consider

• There are no details given about the approach to the literature review. However more than thirty papers are cited, and they are primarily recent and from reputable sources.
  • The survey isn’t representative of any population other than those who have contacted Turn2Us. It may be that those who haven’t contacted the charity experience the poverty premium in other ways, and that their costs are different. However the method replicates that from a previous study, enabling a trend comparison.
  • Only one focus group was conducted with each type of low-income household. Whilst this is not meant to provide findings that are representative of the whole group, there may be experiences and perspectives that have been missed as a result of talking to a limited sample.
• This is a topic that is relevant given the difficulties low-income households face following the coronavirus pandemic.
• The specifics of this study relate only to low-income households in the UK, and relate to how markets for energy, credit and insurance are structured. However the qualitative experiences are likely to apply in other developed countries.
  • This study is mainly applicable to those who play a role in regulating or supplying credit, energy and insurance markets. However the report will also be of interest to anyone seeking to understand the experiences of low-income households more broadly.